Most people won't see a fraction of that money in their lifetimes, although
many of us still play the lottery occasionally—or look for that
one-in-a-million stock chance that'll earn us millions of dollars seemingly
overnight. It's fun to dream, but what if our real financial goals were more
realistic?

What Do You Need to Spend Every Month or Year?

While some people offer advice like Mr. Money Mustache, where spending
as little as possible and saving as much as possible could lead to a
dramatically early retirement age, most people aren't wired to do that (or are
too old to retire before 40).

You have to understand your financial position and set realistic goals.
Perhaps you do want to retire at 50. Perhaps you want to pay for long-term
medical care after age 65. Perhaps you're saving for a house or college or a
trust fund for relatives or charitable good.

Before you can figure out what amount of money will change your life (and
it's almost certainly less than half a billion dollars), you need to know what
your life costs right now.

Do you pay rent? Do you have a mortgage? Roughly how much do you spend on
essentials every month? This could account for everything from food to clothes
to insurance to annual fees. Knowing these numbers gives you a bare minimum
amount that you'll need to survive. (You have to account for inflation over the
long term, of course.)

Start with this number.

What "Bad" Debt Do You Owe?

The next number you need to figure out is what it'll cost you to get out of
debt. This can include everything from balances carried on personal credit
cards to car payments to student loans.

Suppose you're paying $800 a month to one credit card and one car payment.
You own $12,000 on both of those together.

If you could somehow pay off that $12,000 all in one swoop, you'd have an
extra $800 a month to spend or save or invest.

That's your first number. The first dollar figure that would change your
life is the amount it would cost you to pay off all debt on depreciating
assets.

Debt on depreciating assets means that it's not really an investment. Your
car's probably not getting more valuable over time. You're not increasing your
equity the longer you hold on to it. Some people classify this as "bad" debt
for this reason.

What "Good" Debt Do You Owe?

The next category of debt reflects debt on appreciating assets, such as a
mortgage.

Suppose you pay $1,200 per month toward your mortgage and owe $80,000 on it.
If you could wipe out that $80,000 immediately, you'd free up $1,200 every
month ($14,400 every year) to save or invest or spend. Even better, you'd still
have the equity of your house as well as any appreciating value of that
equity.

Some people classify this as "good" debt, because the underlying security
(the house and land) tend to increase in value over time at a rate higher than
your interest payment on your mortgage. This doesn't always happen, but it's
been mostly true for many people in the United States since WW2.

The second dollar figure that will change your life is the amount of money
it would cost you to pay off all debt on appreciating assets.

If you're freed up $2,000 a month between the first and second categories,
you've freed up $24,000 a year. At a pay rate of $12 per hour, that's a
full-time job.

How Much Do you Need to Maintain Your Lifestyle?

So far, these two numbers together are less than $533 million dollars, and
probably much less than $1 million. If you won a $1 million Powerball jackpot, you could
change your life in a dramatic way!

You'd still probably have to work to maintain your lifestyle, however. The
third number is the amount it will take to produce slightly more than you need
every year without touching the principle of your investment.

Suppose you've done the numbers. Once you've paid off your appreciating and
depreciating debts, you need $50,000 a year to maintain your lifestyle. You go
out to eat, take a nice vacation, buy new shoes every year, and pay your
property taxes.

How much principle do you need to invest to generate $50,000 every year
after taxes and inflation?

You probably don't want a risky investment, so shy away from stocks. (Even a
great investment like the S&P 500 index
fund can have off years, where it returns a negative amount, not the 6-8%
it has historically provided). If, instead, you put your money in bonds, you
might get a more stable return, even for a lower payout.

If you looked for municipal bonds, you probably wouldn't have to pay federal
or state taxes, removing one headache for you. Suppose you can find a good
portfolio of municipal bonds paying a 4% annual return. That's a decent rate
and a safe investment and perhaps even avoids taxes.

The third dollar amount that would change your life is the amount you'd have
to invest at 4% in municipal bonds to return the necessary cash every year. For
that $50,000 you need a principle amount of $1.25 million dollars.

(In practice, you probably want a little more than that to deal with
inflation and taxes and incidentals and the possibility you'll find a much
better bond at 3.5, but given that you're reading investing advice, would you
really stop doing anything and never earn any money ever again if $1.25 million
fell into your lap?)

A million dollars is a lot of money, but it's also not an exorbitant amount
of money. It's not mega lottery jackpot money. If you work hard, save well, and
invest well, that dollar figure is within your reach within your lifetime.

It's fun to dream big about huge dollar figures written on oversized checks,
but the kind of life-changing financial independence most people dream about
will cost far less than they imagine. Generating a million and a half dollars
in one shot to do everything may never happen, but you can make amazing
progress toward all three goals now. You have the power to change your own life
and your financial future.